Aggregate Demand and Supply Model - Economic Advisement Essay
With a nominal GDP estimated at more than 15 trillion it is clearly the United States economy is one of the largest in the world. A person must have lived in a cave underground for the past several years to not know that the current state of the nation’s economy is in desperate need of improvement. Many academic institutions have thought about how the economy arrived at its current state and how can it be restored. Some would advocate not using the same economic policies that created the current conditions of the economy. Their philosophy is that if we stay the current course the economy would somehow miraculously recover itself over a period of an unknown amount of time. These same …show more content…
The fixing of interest rates below equilibrium, have distortionary effects on both macro and micro levels. At the macro level, encourages capital flight, discourages domestic saving and employment generation. When rates are negative in real terms, worsens income distribution by wealth transfers saving units to units with access to credit. At the micro level, creates corruption, encourage productive investments and investments with lower rates of return and threatens the financial viability of formal credit institutions that channel or subsidized cheap credit.
To improve the economy, nominal interest rates should be flexible and reflect the rate of inflation (Pollick, 2013). The policies of interest rates on loans and deposits should aim to maintain positive real rates and stable as possible. If financial markets are to function efficiently and equitably, lenders (banks and savers) should be able to get real positive returns of their financial transactions. Finally, financial markets would improve if the project designers considered credit not as an input but as what it really is, a resource that allows the